Nepa: On the weaker side, but larger cost savings than expected bodes well for profitability

Research Note

2023-03-17

08:37

Redeye concludes that Q4 was weaker than expected. Revenue was 5% below expectations, where recurring revenues was on the weaker side and ad hoc revenues in line with expectations. On the positive side, marketing optimization (the company's focus area) grew decently. Adjusted EBIT (excl. one-off costs for cost-cutting program) was weaker than expected, as an effect of lower revenues and lower gross margin. Q1 sales has started with a small revenue decline y/y. A big positive is that the company's cost-savings program will save 31m annually, compared to Redeye's previous assessment of 24m. Redeye will reduce its valuation range by c10%.

JVK

FR

Jesper Von Koch

Fredrik Reuterhäll

Total revenue was SEK76.3m, -3% y/y and below our estimates of SEK79.9m. Slower growth in recurring revenues than expected explains the deviation. Adjusted EBIT (excl. one-off costs for cost-cutting program) was SEK0.7m, corresponding to an EBIT margin of 0.9% (14.1% last year). This was below our estimates of SEK4.2m. Lower sales and lower gross margin than expected explain the deviation.

Source: Redeye, Nepa

Sales development

Net sales per revenue type

  • Recurring revenues reached SEK51.7m, growing 2% y/y and accounting for 68% of total net sales. This was below our estimates of SEK 55.4m.
  • Ad hoc revenues reached SEK24.6m in sales, i.e., -12% y/y and in line with estimates

Net sales per segment

  • Marketing Optimisation (the most promising and profitable segment) reached sales of SEK65.1m, a y/y increase of 10.9%, and accounted for 85% of total sales. For the full year, this segment grew by 18%.

Cost level and profitability

  • Gross margin was 72%, below our expectations of 76% and well below last year’s level of 80%. Nepa explains the lower gross margin by delivering a few strategic projects at a discount, general price pressure on ad-hoc sales due to the weak economic environment, and negative FX effects.
  • Adjusted EBIT (excl. one-off costs for cost-cutting program) of SEK0.7m, corresponding to an EBIT margin of 0.9%. This was below our estimates of SEK4.2m, explained by lower sales and the lower gross margin.
  • Investments in intangibles amounted to SEK7.8m, compared to our estimates of SEK6.4m.

Comment on outlook

  • The cost savings program will gradually start affecting the P&L from January. This will give cost savings of SEK31.2m annually, above our expectations of cSEK24m. We think highly positively of this larger-than-expected cost cut.
  • Marketing Optimization has grown by single digits in January and February 2023, whereas total sales showed a small decline y/y.

Summary and coming changes to estimates and valuation

All in all, the report was rather weak and the short-term outlook is also weak. However, we think these things are more than reflected in the share price. Considering today's low valuation, we think the report is ok, and we are especially positive to the company's cost savings being bigger than we had estimated.

As a result of the report, we will lower our estimates on short-term sales by c5-10%. Regarding more long-term sales estimates, we will lower these somewhat.

As a result, we will likely adjust our Base Case downwards by about 10%.

Disclosures and disclaimers

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